INDIAN HOUSING FINANCE SYSTEM

P.P.Vora
Chairman & Managing Director
National Housing Bank, India

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DEMOGRAPHIC INFORMATION
Situated in the Northern hemisphere, India has one of the oldest civilisations with a kaleidoscopic
variety and rich cultural heritage. India is the seventh largest country in the world covering an
area of 3,287, 263 square kilometers. In terms of population, it is the second largest populous
country and her population as on March 1, 1991 (the last census conducted ) was 846.30 million.
which accounts for 16 per cent of the worlds population. The average annual exponential
growth rate as per the 1991 census was 2.14 per cent. 74.3 % of the population (628.80 million)
live in rural areas and the rest 25.7% ( 217.50 million) in urban areas. The rural population
which accounted for 89.2% in 1901 has come down to a level of 74.3% in 1991 and there has
been a corresponding increase in the urban population. In 1991, India had 23 cities having a
population of more than a million each and the total population of these cities accounted for
nearly 33% of the urban population. The density of population which was 77 persons per square
kilometer in 1901 steadily increased over the years and stood at 267 persons in 1991. The
estimated mid-year population during the year 1996-97 was 936 million.
The Indian Union now comprises of 25 States and seven union territories. Each of the states is
governed by an elected body.
PHYSICAL FEATURES
The country can be divided into four distinct regions viz. the great mountain zone, plains of the
Ganga and the Indus, the desert region and the southern peninsula. The great mountain zone in
the northern part of the country is interspersed with large plateaus and valleys The plains of the
rivers are one of the worlds greatest stretch and richest soil and also one of the most densely
populated areas on the earth. The desert region in the north-west part of the country is divided
into two parts viz. the great desert and the little desert and in between the two lies a zone of
absolutely sterile country, consisting of rocky land cut up by lime stone ridges. The southern
peninsula is flanked by mountain ranges both on the easrtern and the western region. While the
mountain zone in the northern part of the country is susceptible to seismic disturbances, the
peninsular region in the south is relatively stable and subjected to vary rare seismic disturbances.
The climate of India may be broadly described as tropical monsoon type. It can be concluded
that India is one country where the requirement of housing is of different types.
HOUSING SITUATION
The total housing stock in the country was 148 million units in 1991 as compared with 116.7
million units in 1981. However, the useable housing stock was only 133.8 million units in 1991
and 101.5 million units in 1981. The useable housing stock rose by 31.9% during the period
1981-91. In comparison, the total number of households was 153.2 million in 1991 and 123.4
million in 1981. The number of households increased by 24% during 1981-91. It has been
estimated that the useable housing stock will grow by 23% during the period 1991-2001 and the
households will grow by 16.5% during the same period. Thus, the useable housing stock is
estimated to be around 164 million and the number of households around 178 million by the year
2001.
We continue to face the problem of shortage of housing units in the country. The housing
shortage was 23.3 million units in 1981 and it came down to 22.90 million in 1991. It is
estimated that the shortage may come down to a level of 19.40 million units by the year 2001.
While the growth rate in dwellings continue to be relatively lower in the rural areas, it has been
showing an increasing trend in the urban areas thereby indicating greater tendencies of
urbanisation. The period has also been witnessing an increased influx of population from the

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rural to urban areas leading to unorganised settlements due to which there has been a tremendous
pressure on the infrastructure and services available in the urban areas.
HOUSING SHORTAGE
Housing shortage has been estimated on the basis of the number of households including
homeless households, available housing stock, acceptable housing stock, aspects of congestion
and overcrowding. The population census provides background information on households
including homeless households, housing stock, acceptable housing stock (material of wall and
roof). Overcrowding and congestion is assessed on the basis of number of living rooms in the
dwelling unit, number of members and number of married couples in the households. The
National Building Organisation has estimated urban housing needs (backlog) of 8.23 million
units as on 1 March, 1991).
Using the regression growth rates, the present housing shortage has been estimated at 20.41
million.
EVOLUTION & ROLE OF NATIONAL HOUSING BANK (NHB)
Even though there were a large number of agencies/institutions providing direct finance to
individuals for house construction, there was no organised housing finance system as such before
the establishment of NHB in 1988. The vacuum in the institutional finance for housing and other
construction activities was felt due to inadequate flow of funds for such activities from existing
institutions and absence of specialised credit institutions to provide funds for the purpose. The
need to have a specialised system stemmed from the fact that the housing sector was not only
inadequately served in terms of finance for individual loans but also in terms of buildable or
serviced land, building materials, effective low-cost technology and other related know-hows.
The National Housing Bank was established to create such a system. The Bank has been
mandated to establish a network of housing finance outlets across the vast span of the nation to
serve different income and social groups in different regions. The primary responsibility, of
course, is to develop a healthy and self sustaining housing finance system in the country.

PROMOTION & DEVELOPMENT FUNCTION

NHB was set up at a time when the local and regional level housing finance institutions were
nearly absent and the banking sector had no pressing priority to do housing finance on any
significant level. As a result, the sector has been grossly capital-deficient and the housing
shortage in the country has grown alarmingly. The purpose of setting up more local and regional
level specialised institutions is to have dedicated outlets for supply of housing credit. NHB is of
the opinion that intervention through institutional credit can be made more effective by adoption
of different approaches to cater to the needs of different income groups. The households above
the average income could well be served by institutions which raises resources through the open
market and deliver credit with minimum necessary prudential regulations by the regulator. For
the households below the poverty line, the institutional credit will have to take into account the
employment and poverty alleviation programmes having an element of subsidy. It is the middle
group which constitutes nearly half the total number of households that needs to be taken care of.
NHB is encouraging the financial institutions to lend to this segment through its refinance
schemes. With the setting up of NHB in 1988, there has been sustained efforts at creating and
supporting new set of specialised institutions to serve as dedicated centres for housing credit.
REGULATORY FUNCTION

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The second important function of the Bank is the regulatory role assigned to it. This
responsibility becomes all the more relevant as the housing finance system enters a secondary
phase of development in terms of integration with the debt and capital markets. The case for
regulation also emanates from the need for a credible and stable housing finance system. Without
in any manner going against the free market approach, the Bank has attempted to put in place an
effective system of responsive regulation. The housing finance system is still evolving in the
country and in this context it becomes necessary that it exhibits a greater amount of stability in
terms of resources development, policy development and institution building. NHB has evolved
over a period of time directions and guidelines in keeping with the various functions it has to
carry out. NHB has come out with a guideline for recognising HFCs for its financial assistance,
guidelines for extending financial assistance as also the Housing Finance Companies (NHB)
Directions. Besides, NHB has also issued guidelines for prudential norms for income recognition,
asset classification etc.
FINANCIAL FUNCTION
The third important role of the Bank is to provide financial assistance to the various banks and
housing finance institutions. As an apex refinance institution, the principal focus of NHBs
programmes is to generate large scale involvement of primary lending institutions falling in
various categories to serve as dedicated outlets for assistance to the housing sector.

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INSTITUTIONS PROVIDING HOUSING FINANCE
In India, the following types of institutions provide long term finance for housing:
Commercial banks
Cooperative banks
Regional rural banks,
Agriculture and rural development banks
Housing finance companies and
Cooperative housing finance societies.
The commercial banks are the largest mobiliser of savings in the country. The household sectors
savings in financial assets has been steadily increasing over the last three years from 8.9% of
GDP in 1995-96 to 10.8% in 1996-97 and further to 11.4% in 1997-98 (provisional estimates).
Similarly, the share of deposits comprising of bank deposits, non-bank deposits and net trade debt
has also shown a n increasing trend and accounted for more than 54% of the household sectors
savings in the financial assets in 1998-99. In terms of coverage also, the banking system has the
largest branch network. The commercial banks had 64,239 branches in the country and the
average population per bank branch was 15,000. However, in the past, the savings mobilised
were not being ploughed back to the households for shelter purposes. The reluctance on the part
of the banks to extend credit for housing as a regular part of their business was basically due to
their perceived role as being limited to financing of working capital needs of commerce, industry
and trade. Yet another factor was that the banks did not want to tie up their short-term resources
in extending long-term housing loans. However, after the nationalisation of some of the banks in
1969, the banks became more responsive to the social needs of the community. Today, in India,
the commercial banks are required to earmark a minimum of 3% of their incremental deposits for
extending to the housing sector. For the current year 1999-2000, this works out to Rs. 36,000
million. (approx. US $ 827 million).
The state co-operative banks (St.CBs) are the apex level institutions of the State co-operative
credit structure. There are at present 28 such apex St.CBs While the Co-operative banks and the
Regional Rural Banks are allowed to lend for housing, they have not been very active in this
field.
The Agriculture and Rural Development Banks (ARDBs) are term lending institutions operating
exclusively in the rural sector. Housing finance was not originally within the ambit of their
functions. Following the thrust given to the housing sector in the late eighties and more
particularly after the establishment of NHB, several States have amended their respective Acts to
enable these institutions to lend for housing in the rural areas. At present there are 19 ARDBs in
the country either operating through 854 of their own branches or through 745 branches of the
primary co-operative agriculture and rural development banks.
The housing finance companies are basically non-banking financial companies. A non-banking
financial company is classified as an housing finance company if providing housing finance is the
principal object of the company or where there are more than one principal object as per the
Memorandum and Articles of Association, housing finance should form a major share of the
companys asset pattern as revealed by its latest balance sheet. At present there are 354 such
companies. However, most of them are very small companies having little or no business. There
are 29 major companies which account for more than 95% of the total housing loans sanctioned
by all these companies put together. These 29 companies have been recognised by NHB for
refinance assistance. To be eligible for approval for availing refinance facility from NHB, a
minimum of 75% of the capital employed should have been by way of long-term finance for
housing. These 29 companies have 474 branches all over the country.

The other set of specialised housing finance institutions are the co-operative housing finance
societies. They essentially have a two tier structure, comprising the Apex cooperative housing
finance society (ACHFS) at the State level and the primary cooperative housing finance society
at the retail level. Several different types of cooperative housing societies operate at the primary
level and these can be broadly classified into four major types:

i) Tenant Ownership Housing Societies

ii) Tenant co-partnership housing societies
iii) House construction or house building societies
iv) House mortgage societies.
There are 25 State level Apex societies and the number of registered cooperative housing finance
societies in the country is 90,000.
NHB has formulated schemes to support all these agencies and help them to cater to the housing
needs of the community at large. The Bank is also extending financial assistance directly to
public agencies for undertaking housing and infrastructure projects.
TYPES OF HOUSING LOANS
Most of the institutions offer a standard fixed rate mortgage to the prospective borrowers.
Usually, the housing loan can be repaid over a maximum period of 15 years. Repayment does not
extend beyond the retirement age of a person (60 years) if employed or 65 years of age if self
employed. Repayment of the loan is done through the equated monthly instalment method. In
case of borrowers expecting a reasonable growth in their future income, instalments can be on
graduated basis. Besides, interest rate, the borrower also has to meet certain other costs viz.
interest tax, processing fee and administration fee. The lender is required to pay a tax to the
Government on his interest income at the rate of 2% per annum. The lenders usually pass on this
tax burden to the borrower. The banks and the housing finance companies also levy a fee for
processing the application and it varies between 0.5% to 1% of the loan amount. Besides they
also charge what is known as an administration fee of 1% of the loan amount.
The interest rate on housing loan offered by the housing finance companies has been falling in
the recent years and it is now the lowest in the last 17 years. The interest rate on loan amount of
Rs.500,000 (US $ 11,765) which used to be in the range between 14.5-15.5% a year ago have
come down by 100 basis points now. Similarly, there has been 100 basis points across the board
reduction in the interest rate for loan amount beyond Rs.500,000. Some of the housing finance
companies do have a system of charging either 50 basis points or 25 basis points more than the
normal lending rate in case the term of the loan is extended beyond 10/15 years. In respect of the
banking system, the Reserve Bank of India has given the freedom to commercial banks to fix the
interest rates on term loans beyond Rs.200,000 and these rates are related to commercial banks
prime lending rates which is in the range of 12.5 to 13% per annum. Since the cost of funds to the
banking system is lower than the cost of funds to the specialised institutions, their interest rates
are comparatively lower than the rates charged by the specialised housing finance institutions.
However, since the banking system is in the process of developing adequate expertise in housing
finance, the share of the housing finance companies in the housing finance business is more than
that of the banking system.
The year-wise details of housing finance disbursed by various institutions for the last five years
are given below:

1994-95
Commercial
banks
Housing
Finance
Companies
ACHFS
ARDBs

1995-96

1996-97

1997-98

(in Rs. million)

1998-99

7486

7992

18056

10767*

14972*

35243

39035

46277

57834

74134

5303
264

3430
385

3147
387

5196
730

1127

* Allocation for the respective years.

SOURCES OF FUNDS
Apart from the various financial institutions mentioned above which act as retail lenders, the
Central and the State Governments also support the house building efforts of the people
indirectly. The role of the Central Government is confined to laying down broad principles of
social housing schemes, providing necessary advice and rendering financial assistance in the
form of loans and subsidies to the State Governments/Union Territories. The Central Government
has also set up the Housing & Urban Development Corporation (HUDCO), a housing finance
company, to finance and undertake housing and urban development programme, development of
land for satellite townships besides setting up of building centres. The Central Government also
provide house building advance to its employees.
The State Governments, besides implementing the social housing schemes formulated by the
Central Government also formulate their own scheme for providing houses to the poor and those
belonging to the backward classes. Besides extending loans to their own employees for
construction of houses, the State Governments also provide funds for rental houses for their
employees and to various housing Boards and development authorities for constructing houses
for different income groups.
The Life Insurance Corporation of India (LIC) as well as the General Insurance Corporation of
India (GIC) support housing activity both directly and indirectly. LIC is statutorily required to
invest 25 per cent of their net annual accretion in socially oriented schemes including housing.
LIC grants loans to State Governments for their rural housing programmes and to State level
Apex Cooperative Housing Finance Societies. LIC also subscribes to the bonds floated by
HUDCO and the State Housing Boards. NHB has also borrowed money from LIC. They also
provide loans to individuals who are policy holders. LIC has , in June 1989, promoted a housing
finance subsidiary and provide funds to it.
GIC and its subsidiaries are required to invest 35% of their annual accretion by way of loans to
socially oriented sectors. GIC, like LIC, subscribes to the bonds floated by HUDCO and State
Housing Boards. In July 1990, GIC established a separate subsidiary as a housing finance
company to lend to the individuals directly and provides funds for its operations.
The Provident Funds have been providing loans to the subscribers only for housing or they allow
part withdrawal. The investment pattern of the Provident Fund in the past has been as per the
guidelines issued by the Government and lending for housing did not form a part of it. Even
tough of late, the Government has given freedom to the Provident Fund Organisation in deciding
their investment policy, housing has not been in their priority list.

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Essentially, the funds flow from these organisation have a long maturity period and ideally suited
for housing activity. However, the flow of funds from these institutions have not been adequate.
The specialised institutions like the housing finance companies have been looking for funds from
the general financial institutions and deposits from the public till the establishment of NHB in
1988. These funds are essentially short term in nature and lead to an asset- liability mismatch.
After the establishment of NHB, some of the companies received refinance assistance from NHB
which is co-terminus with the repayment period fixed by them to the ultimate borrower.
However, NHB can not keep on funding the entire portfolio of these companies. Thus, there is a
need to look for avenues that can provide long-term funds to the specialised institutions.
In order to ensure orderly and smooth growth of the housing finance companies, NHB, as a
regulator, has prescribed the period for which these companies can accept deposits and the
maximum amount that these companies can borrow. For instance, the housing finance companies
can not accept deposits for periods less than 12 months and more than 84 months. Similarly, to
accept deposits from the public, they are required to have a minimum net owned fund of Rs. 2.5
million and a minimum acceptable credit rating. Further, in order to ensure that these companies
do not over stretch themselves, NHB has prescribed limits for their borrowing/acceptance of
deposits from the public in relation to their net owned fund.
RURAL HOUSING
In India, nearly three-fourth of the population resides in the villages where the main economic
activity is agriculture. Many of these people do not even own land and they are mainly labourers.
Providing houses for these people is a stupendous task and concerted efforts are needed from all
the agencies.
Government of India has initiated a good number of measures for promoting rural development.
Specialised institutions have been set up to provide rural credit. Several financing and
developmental agencies have played a crucial role in implementing the Government sponsored
programmes for rural housing.
Among the various schemes formulated by the Central Government over the years, one particular
scheme need to be mentioned viz. The Indira Awas Yojana (IAY)
IAY is a centrally sponsored hundred percent subsidy scheme with the resources being shared on
80:20 basis by the Centre and the State respectively. As per the present norms, the permissible
expenditure on a house under this scheme including the cost of construction of a sanitary latrine,
smokeless chullah and infrastructural and common facilities is Rs.20,000 in plains and Rs.22,000
in hilly or difficult areas. The achievements under this scheme from 1990-91 to 1997-98 is given
in the table below:
Year
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98*
* Provisional

Amount
Utilised (Rs. million)
2131
2630
2388
4810
5004
11664
13859
13458

Number of Houses
Constructed
181800
207299
192585
372535
390482
863889
806290
641325

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Source: Annual Report 1997-98, Ministry of Rural Areas & Employment,
Government of India.
In its efforts to promote housing activity in the country, NHB has recognised that providing
shelter in rural areas should be given due priority. Of the six categories of institutions through
which financial assistance from NHB is channelised, all except the primary(urban) cooperative
banks provide finance for rural housing. The institutions are the scheduled commercial banks,
state cooperative banks, agriculture and rural development banks, apex cooperative housing
finance societies, and specialised housing finance institutions.
In view of the peculiar problems in rural areas, it becomes necessary to identify appropriate
institutions which have a better knowledge and understanding of the problems faced by the rural
population and provide them with financial assistance. As a first step, NHB identified the
Agriculture and Rural Development Banks(ARDBs) as intermediary for long term rural lending.
The ARDBs are being used as dedicated outlets for rural housing credit.
Besides the scheduled commercial and cooperative banks as also the ARDBs, NHB is extending
financial assistance for rural housing through specialised housing finance institutions. Notable
among them in the context of rural housing is the Gujarat Rural Housing Finance
Corporation(GRUH).
This company has been promoted to primarily serve the cause of rural housing and provide
institutional finance to maintain and augment the rural housing stock and upgrade the overall
living environment of rural settlements. 70% of its cumulative loan approvals are in respect of
those dwelling units which are located at places where the population does not exceed
15,000.Over 50% of the cumulative loan approvals are in respect of those individuals whose
monthly income is less than Rs. 2,500. Similarly, 64% of cumulative loan approvals are in
respect of individuals whose loans are less than Rs. 50,000/Orissa Rural Housing and Development Corporation (ORHDC) is another company that has
been established to provide financial assistance in the rural areas. This company has been
promoted by the State Government.
The various initiatives taken by the Government are aimed at ameliorating the housing problems
of the people below the poverty line. The people above the poverty line also need to be helped in
realising their dream of owning a house. The institutional mechanism described above partly
helped in this regard. However, a definite thrust needed to be given for making available
institutional credit in the rural areas so that a majority of them could be helped.
Accordingly, NHB prepared a scheme for extending financial assistance for housing in rural
areas. The scheme is being operated through the vast network of the branches of the commercial
banks, housing finance companies, regional rural banks, State co-operative banks, agriculture and
rural development banks and the co-operative housing finance societies.
The objective is to address the problem of rural housing through improved access to housing
credit which would enable an individual to build a modest new house or to improve or add to his
old dwelling in rural areas. Rural area for the purpose of the scheme is the area comprised in
any village including the area comprised in any town, the population of which does not exceed
50,000 as per the 1991 census.
It was proposed to disburse loans for 50,000 dwelling units during the first year. This target was
exceeded. Encouraged by this, the target for the year 1998-99 was doubled and it was proposed to

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disburse loans for 1,00,000 dwelling units. Even this target has been exceeded. It has been
proposed to sanction loans for construction of 1,25,000 dwelling units during the current year.
CONSTRAINTS IN EXPANDING FINANCIAL ASSISTANCE
The basic security for the loan to be given to the borrower is the mortgage of the property. In the
case of farmers, the agricultural land can not be mortgaged. In many rural areas, clear
demarcation of the land for agricultural and other uses may not exist. Similarly, in many villages,
land records may not be available to verify the title to the land. Steps have been initiated to create
land records where they are not in existence
Another impediment is the very high registration charges imposed on transfer of the land. If these
charges could be lowered significantly, the affordability level could be increased and many
people will come forward to construct houses.
INTEGRATION OF INFORMAL SECTOR WITH FORMAL SECTOR
The main problem of the poorer people in any country is that they do not have access to
institutional finance. It is, therefore, necessary to find out ways in which these people can be
brought to the fold of the institutional finance. Secondly, most of these people belong to what is
commonly known as the unorganised or informal sector. Although India can be proud of a
mature primary market, the efforts of all HFIs and banks, including the foreign banks, tend to be
focussed around the formal sector i.e., on the employee class. To some extent, housing loans are
also being accessed by professionals such as lawyers and doctors, but by and large, the informal
sector comprising smaller businessmen, traders and others has not even been conceptualised as a
target market for housing.
There are of course factors that preclude the provision of financial information by borrowers in
this sector in a form and manner required by the financial institutions and therefore, this segment
of the population look for non-institutional credit. Recently, a number of initiatives have been
taken in India to bring in a majority of such population to the formal sector financial institution
fold. The Reserve Bank of India had set up an working group to study the functioning of the Self
Help Groups (SHG) and Non-Governmental Organisations (NGOs) for expanding their activities
and deepening their role, linking of SHGs with banks, capacity building of NGOs etc. Similarly,
the emergence of microfinance sector is also of recent origin in India. A few community based
financial institutions (CFIs) also emerged. While initially, all these institutions provided funds to
the people to set up income generation activities, over a period of time some of them have
provided funds for shelter improvement also.
While the exact number of microfinancing institutions in the country has not been ascertained, it
has been estimated that there could be 250-300 voluntary agencies in micro-finance each with 50100 SHGs. NHB has formulated a refinance scheme for the loans advanced by the housing
finance companies to the community based finance institutions. Six projects involving a linkage
between CFIs and housing finance companies were identified under the technical assistance
programme from Asian Development Bank to improve the understanding of the informal sector
lending for housing as well as the willingness on the part of the formal and informal institutions
to provide affordable credit to urban and rural poor. Of the six projects, two are well underway
with the disbursal of the first tranche of the loan amounting to Rs. 6.6 million disbursed to about
200 beneficiaries. Sanction letters have been issued in respect of another two projects.
Some major institutional concerns and operational problems have emerged from this experience.
Some of these relate to the rates of interest, security for the loan, selection of borrowers and
credit appraisal, loan processing fee, end use of funds, organisational problems at the SHG level

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like the capacity to manage long term loans etc. these are being analysed to find out a solution
before the same could be replicated elsewhere in the country.
INVOLVEMENT OF MULTILATERAL AGENCIES
The United States Agency for International Development (USAID) under the Housing Guaranty
Program of the US Government permitted the Housing Development Finance Corporation Ltd.,
the premier housing finance company in India, to borrow from the US Capital Market a total of
US $ 125 million under various tranches commencing from December 1981. The last tranche was
drawn in January 1988. The funds so raised are to be lent for low income households.
With the setting up of NHB in July 1988, NHB entered into an agreement with UASID to raise
money in the US Capital Market. NHB raised a modest amount of US $ 25 million. In addition ,
USAID also provided Technical Assistance for the development of the Indian Housing Finance
System.
In 1991, the Overseas Economic Co-operation Fund (OECF) entered into an agreement with
Government of India to extend loan assistance of Japanese Yen 2.970 billion under the housing
programme for low and median income households through NHB. The fund has been fully
utilised.
More recently, the Asian Development Bank has also provided Technical Assistance to NHB to
strengthen the housing finance institutions, to set up a mortgage insurance fund and to promote
business linkages between housing finance institutions and CFIs. The ADB also extended a loan
assistance of US $ 100 million each to NHB, HDFC & HUDCO for onward lending to borrowers.

ISSUES IN THE DEVELOPMENT OF THE HOUSING FINANCE SECTOR

The major issue in the development of the housing finance sector in India is the availability of
long term resources for the sector. One such source is mortgage securitisation which has still not
been done in India. NHB has been making sustained efforts to launch a pilot issue of mortgage
backed securities by pooling the mortgage loans originated by a few select housing finance
companies. However, in the absence of a conducive legal and regulatory framework, NHB has
been constrained to design the transaction within the existing legal and regulatory framework,
leaving scope for certain amount of imperfection.
The constraints are specifically emerged from some legal issues, taxation matters and the
regulatory environment. As the mortgage debt is regarded as an immovable property in India, its
transfer can be effected by means of an instrument in writing, which require payment of stamp
duty for the instrument to be valid. The stamp duty on conveyancing range from three to
seventeen percent of the consideration for transfer in different states. Further, such mortgage
debt can be transferred only by a registered instrument. As securitisation envisages pooling of
mortgages originated by housing finance institutions in different states, the requirement of
registration not only make the transaction unviable from cost consideration but also impractical.
In addition there are problems in the area of foreclosure of mortgages. In order to tackle the
problem of registration, NHB has proposed to constitute a Trust only in the debt component of
the mortgage debt and hold the underlying securities with the originator or the issuer with
adequate legal safeguards. While some of the state governments Have realised the importance of
mortgage securitisation have reduced the stamp duty payable on the instrument of securitisation
to 0.1%, the other state governments are expected to reduce the stamp duty on such instruments.

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As securitisation is a very recent phenomenon in the Indian context, Indian income and other tax
laws are not supportive to such transactions. The interpretation of these statues in their present
form make the transferor liable to taxation if the transfer is without the transfer of legal interest
or the underlying assets. These and other related issues are being sorted out by NHB with the tax
authorities.
There are no regulatory guidelines/prudential norms in India on transactions involving mortgage
securitisation. In the absence of such guidelines, investor acceptability for such products may be
limited and may hamper development of a secondary markets for such products. These are being
addressed to.
The efforts of NHB to structure its pilot issue of mortgage backed securities is to develop the
market awareness about the product and to sensitise the regulatory authorities about the need to
create an enabling environment.

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ISSUES IN THE DEVELOPMENT OF THE HOUSING SECTOR

Availability of land is crucial for the development of the housing sector. A major constraint has
been the availability of land. In order to impose ceiling on vacant land in urban agglomerations
and for the acquisition of such land in excess of the ceiling limits with a view to prevent the
concentration of urban land in the hands of a few persons, the Government has enacted the Urban
Land (Ceiling & Regulation ) Act in 1976. Based on the experience and review of the working of
the Act, it was evident that none of the objectives laid down in the preamble to the Act had been
achieved. Therefore, this Act has since been repealed very recently. This along with the proposal
to levy a vacant land tax should release substantial amount of vacant land. Once the supply
increases, the price is also, expected to come down and many households who considered
themselves priced out of the market could think of owning a house.
Another legislation that has come in the way of providing rental housing has been the Rent
Control Act which in its existing form is tilted in favour of the tenants. The Central Government
has already passed an Act to remove this anomaly and it is yet to be adopted by the State
Governments.
Similarly, the existing foreclosure mechanism is also cumbersome and time consuming. In order
to protect the interests of the lenders, suitable suggestions have been made to simplify the
foreclosure mechanism.
High rate of stamp duty has also come in the way of the development of the housing sector.
Efforts are on reduce the stamp duty so that the buyers burden is reduced.
The silver lining is that recently the Government has given thrust to the development of the
housing sector both from the demand and the supply side by providing fiscal concessions to the
providers of the house as well as to the buyers who borrow to acquire the house. The effect of
these measures have become evident since the rate of growth of housing finance business by the
housing finance companies during the first quarter of the year has exceeded the growth rate
witnessed during the corresponding period of the last two years.
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References:

1. National Accounts Statistics, 1998; Central Statistical Organisation, Department of Statistics,

Ministry of Planning and Programme Implementation, Government of India.

2. India 1999, A reference annual; Publication Division, Ministry of Information and

Broadcasting, Government of India.

3. Reserve Bank of India Bulletin, March 1999

4. Reserve Bank of India, Annual Report 1997-98